TODAY -

Market creating innovations and vertical integration

Anand Laishram *



In the previous weeks, we have talked about the pull strategy for economic development, Market Creating Innovations, non-consumption and business model innovation. This week letís look at something called vertical integration in the context of market creating innovations.

To understand vertical integration, we need to first understand what a value chain is.

A value chain can be at the firm level or the industry level. At the firm level, it means the set of activities that a business performs in order to produce its goods/ services. The activities can be divided into primary & supporting activities.

For example, for a firm making potato chips, the value chain would involve procuring the raw materials (such as potatoes, oil, salt etc.), the manufacturing process, packaging, marketing, sales etc. At the industry level, a value chain represents the various processes, involving multiple businesses, involved in the production & distribution of products/ services.

For example, for the potato chips industry, the value chain would involve the raw material production (growing potatoes, oil production, salt production etc.), the manufacturing of the potato chips, the distribution through wholesale & retail outlets etc.

When a business, at a certain stage of the industry value chain, creates forward or backward linkages, it is said to be vertically integrated. In the case of the potato chips industry, if a manufacturer of potato chips starts growing its own potatoes or starts running its own retail outlets, then that will be termed vertical integration.

Vertical integration can be backward or forward. If a potato chips manufacturer grows its own potatoes, they are backward integrated. If they start distributing themselves, they are forward integrated. If the business supplying potatoes to manufacturers starts making their own chips, they are forward integrated.

The decision to vertically integrate needs to be taken with a lot of due diligence, as the business would need to start performing activities outside of its current core competencies.

Thatís the reason why, in more developed economies, businesses tend to specialize and avoid vertical integration. It is more efficient to rely on other specialists for other processes involved in the value chain.

For example, it is efficient for a car manufacturer to focus on building cars, instead of also get in the business of refining the steel or mining the iron ore it needs for building cars. The manufacturer is better off procuring the steel from a specialized steel supplier. The core competencies required for building cars and steel refining are quite different.

However, this emphasis on specialization in developed economies doesnít translate well to developing economies. This is because a business operating in a developing economy may not have reliable suppliers or distributors they can work with.

It is easy to hyper specialize in a place like Silicon Valley. But in a place where the business ecosystem is not well developed, specialization may not be a viable option. Therefore, in order to reliably get its products or services to the consumers, a business operating in a developing economy may need to vertically integrate.

For example, during the early years of the Ford Motor Company, when America wasnít the economic powerhouse it is today, they had to refine their own steel and make their own glass. This is important to understand in the case of market creating innovations.

By definition, Market Creating Innovations allow non-consumers to consume the solutions they need to make progress in their lives, by making those solutions affordable, accessible & simple. Market Creating Innovations are more relevant in the case of developing economies, where the business ecosystem is not well developed.

Therefore, in order to successfully meet the needs of their market, businesses will need to vertically integrate. Letís illustrate this with an example. Tolaram started out as a trading company based in South East Asia. They were involved in the business of trading garments & textiles. They also had a presence in Africa.

In the poverty-stricken country of Nigeria, Tolaram saw a business opportunity. Nigerians had low per capita incomes & a large percentage of their incomes had to be spent on purchasing foods. They were in need of foods that were more affordable & easier to prepare.

Therefore, starting in the 1980s, Tolaram started shipping Indomie noodles (manufactured in Indonesia) all the way to Nigeria. The noodles became a massive hit. It was easy and quick to prepare and quite affordable. It became an important part of the diet of Nigerians, even though historically, noodles didnít feature quite a lot in their cuisine.

However, Tolaram had to ship the manufactured noodles all the way from Indonesia. It could save oncosts & pass on the savings onto the customers if they manufactured the noodles right in Nigeria itself. Therefore, they set up a manufacturing plant in Nigeria.

However, since Nigeriaís business ecosystem wasnít well developed, they couldnít find reliable distributors to work with. Therefore, they went into the logistics business themselves and set up their own network of trucks & staff. They also faced hurdles in getting a reliable supply of electricity, therefore they had to set up their own power plants as well.

These vertical linkages were costly, but Tolaram had to make the investments in order to reliably manufacture & get the product to their customers. This is quite common when doing business in developing economies. They have untapped markets but serving those markets require costly investments. However, the investments can be justified if the market opportunity is attractive enough.

Moreover, by investing in building the proper infrastructure where they didnít exist before, businesses can supply other businesses also interested in entering that market. In the example above, Tolaram had to basically create its own logistics & electric utilities businesses, in order to be able to manufacture & distribute their manufactured noodles.

However, when other food companies entered the Nigerian market, they outsourced transportation & power supply to Tolaram. Their logistics & utilities businesses started out as cost centres, but later became profit centres on their own. In 2015, they sold a 50% stake in their logistics business to American giant Kellogg for $450 million.

Therefore, if a business intends to target non-consumption in a developing economy, it may have to roll up its sleeves & vertically integrate.


* Anand Laishram wrote this article for The Sangai Express
This article was webcasted on May 18 2022 .



* Comments posted by users in this discussion thread and other parts of this site are opinions of the individuals posting them (whose user ID is displayed alongside) and not the views of e-pao.net. We strongly recommend that users exercise responsibility, sensitivity and caution over language while writing your opinions which will be seen and read by other users. Please read a complete Guideline on using comments on this website.




LATEST IN E-PAO.NET
  • ILP Check point at Jiri : Gallery
  • COVID-19 Status 27 June : Govt of Manipur
  • The untold story, lest it be forgotten
  • Assistance to victims of Assam Flood
  • A glimpse of 'Yangna Paikhredako Punshi'
  • Market innovations in developing country
  • COVID-19 : Impact in Manipur :: News Timeline
  • Anti-drug day expose state pathetic situation
  • The wedge amongst the Nagas
  • Coming of Manipur University in 1980
  • COVID-19 Status 26 June : Govt of Manipur
  • Laitonjam Lanchenba: Best Swimmer
  • Our capital Imphal - the city of sanity
  • Workshop : ND & PS Act, 1985
  • Mara Prabhu - Lord of the trees
  • Essence of international anti-drug day
  • July 1 : Taking the fight to plastic
  • Miss Shirui Lily 2022 #3 : Gallery
  • COVID-19 Status 25 June : Govt of Manipur
  • Flesh Trade : Connection between Goa & NE
  • Importance of Soil Testing & Management
  • ST status Vs Classical language for Meetei
  • Life, faith and belief
  • MANISFA General Secretary appointed
  • Flood Watch : 23rd June #2 : Gallery
  • COVID-19 Status 24 June : Govt of Manipur
  • Community led in ensuring HIV treatment
  • Approach to ideology & development
  • Solar Energy solution for healthcare facility
  • Yoga for health, beauty and immunity
  • Innovation Prize Launched for Designers
  • Knotty higher education sector
  • Classical language status and ST demand
  • Flood Watch : 23rd June #1 : Gallery
  • COVID-19 Status 23 June : Govt of Manipur
  • Birds and Bees Talk launched 3rd phase
  • Luck matters, Rio's first entry into cabinet...
  • Need to deal with dumping of waste materials
  • Training on mushroom at Nagamapal
  • 1961 as base year: Take it or leave it
  • 10 years too late : JCILPS
  • Phamnaiba Jagoi @ Thangjing : Gallery
  • COVID-19 Status 22 June : Govt of Manipur
  • Women's cleanliness enjoys equal rights...
  • Life in some hill villages
  • The MCI Restoration II
  • 'BRO Cafes' on 75 border roads
  • Protest over boundary row headache for Govt
  • Issues on the indigenous question
  • Drug Menace In Manipur : Gallery
  • COVID-19 Status 21 June : Govt of Manipur
  • ST tag for Meiteis - A perspective!
  • Manipur State Welfare : Politics 1-0 Citizens
  • International Yoga Day at Assam Rifles
  • International Yoga Day at IBSD Imphal
  • International Yoga Day at NSU Imphal
  • Manipur Lokyukta: Fighting against corruption
  • Vision to distribute local rice under NFSA...
  • Taking the fight to the drug menace
  • Landslides - Imphal-Jiri [Jun 17] : Gallery
  • COVID-19 Status 20 June : Govt of Manipur
  • Thangjing in folklore of Koireng tribe
  • Health Workshop on Diabetes at Pune
  • Everyone is a thief :: Poem
  • E- barton for CM & Governor
  • Intensive cultivation of vegetables
  • High time to encourage e-vehicle operators
  • Scripting success story with Rs 500
  • Leima Jagoi by Transgender #1 : Gallery
  • COVID-19 Status 19 June : Govt of Manipur
  • June 19 2022 : Father's Day message
  • Nine Hills One Valley : Ottawa Film Fest
  • Shirui Lily Festival or mud festival ?
  • Yoga for Women organised
  • Flight link to Mandalay dream come true
  • Action of Govt needs to be backed
  • 21st Great June Uprising #1 : Gallery
  • COVID-19 Status 18 June : Govt of Manipur
  • The Great June 18 Uprising :: News Timeline
  • Revive environmentalism in Meetei ethos
  • COVID-19 Status 17 June : Govt of Manipur
  • Elephant army of Lord Guruvayurappan
  • Who will be next at Rashtrapati Bhawan
  • Hiyang Tannaba @ Loktak #1 : Gallery
  • Freedom movement against British #2
  • Inequity and health security
  • Donating blood is an act of solidarity
  • Unregulated deposit schemes & BUDS Act
  • Extension of entry age : Agnipath
  • Citizens feeding on adulterated food items
  • Of food safety and street vendors
  • Pooja Elangbam, IAS, 81st ranker in AICS
  • COVID-19 Status 16 June : Govt of Manipur
  • NE Model @Delhi Kids Fest : Gallery
  • Manipur Rajkunja
  • Effective Legal Aid to Women Prisoner
  • How to avoid cracked heel during hot summer
  • Aid to artisan must to promote local product
  • Education for whom ?
  • Kabui Dance @Nongshaba Haraoba : Gallery
  • COVID-19 Status 15 June : Govt of Manipur
  • 'Let's Talk About It' : music album
  • Significance of World Environment Day
  • The MCI Restoration
  • North East CSR Award 2022
  • Prolonged sitting or standing spoils your leg
  • State fast-tracking towards drug making hub
  • 'Progression' from smuggling to manufacturing
  • Bonny Elangbam : Longest distance covered
  • COVID-19 Status 14 June : Govt of Manipur
  • Interaction with Makakmayum Hosni Mubarak
  • India to become $5 trillion economy
  • Exploring traditional medicines of NE
  • Freefall of the kids after COVID-19
  • Honour the tax payers, expose defaulters
  • NE needs more than 'unprecedented'
  • Miss Shirui Lily 2022 #2 : Gallery
  • COVID-19 Status 13 June : Govt of Manipur
  • Water management in paddy cultivation
  • PM Modi hails Nagaland Gaon Burahs
  • Blight of Nature :: Poem
  • Moreh as Las Vegas
  • NHIDCL's reputation at stake
  • Drugs, poppy & 'alternatives'
  • Thaopai Shithaine of Poumai #2 :: Gallery
  • COVID-19 Status 12 June : Govt of Manipur
  • Jadonang Park, Tamenglong :: Gallery
  • Freedom movement against British #1
  • Multi-Tasking Staff at Leima Traders
  • Toning down rhetoric that hurts religion
  • Shirui Lily fest brings to fore plastic menace
  • Conservation of pony & grazing fields
  • Kakwa Lairembi Haraoba #2 :: Gallery
  • COVID-19 Status 11 June : Govt of Manipur
  • The unheeded cry of children in labour
  • Why present distribution of urea fails?
  • World Day Against Child Labour 2022
  • Sunrise on the Civil Aviation Horizon
  • Arambam Samarendra Ningshingba :: Gallery
  • COVID-19 Status 10 June : Govt of Manipur
  • NE Ex-Super Model at Delhi Kids Fest
  • What Diphu has, Dimapur & Kohima don't
  • Towards Manipur Budget 2022-23 ...
  • NE Social & Behaviour Change inaugurated
  • Fighting corruption remains an uphill task
  • Environment needs more than tree plantation
  • SN Chand: The father of Manipuri cinema #3
  • COVID-19 Status 09 June : Govt of Manipur
  • Degree Certificate for Survival #2
  • Value chain management of Umorok
  • Pulses for Nutrition Security in Manipur
  • Keeping your skin oil free during summer
  • Demand for impartial probe into IMC scam
  • Politics of isolating the NSCN (IM)
  • Raas @Manipur Rajbari, W Bengal :: Gallery
  • COVID-19 Status 08 June : Govt of Manipur
  • A rare book on Birds of Manipur
  • Condemns bomb blast in Manipur
  • Market Innovations made America great #2
  • Jal Jeevan Mission : PHED Manipur
  • Disturbing data on lifestyle diseases in state
  • Tough talk against drug menace
  • Trekking to Shirui Peak, Ukhrul #2 :: Gallery
  • COVID-19 Status 07 June : Govt of Manipur
  • Take a leaf from sunderban if you're serious
  • Testimony of brother Ninghor Mahongnao
  • Local leaders unitedly push for One Health
  • Letters from the Republic of Dust #2
  • Soil testing for better crop production
  • Despicable threat to school
  • Outrage at Little Flower School
  • Ibudhou Thangjing Lam Thokpa #3 :: Gallery
  • COVID-19 Status 06 June : Govt of Manipur
  • India-Taiwan Global Bamboo Tech Forum
  • Condemns bomb attack at LFS
  • RSS chief sounds logical
  • Career options in Environmental Science
  • We reap what we sow
  • NRC in focus as keyboard warriors spar...
  • Coming together of COCOMI, UNC
  • HSE Result 2022 : Statistiscal Abstract
  • HSE Result 2022 : Subject Pass Percentage
  • HSE Result 2022 : District-Wise Pass %
  • HSE Result 2022 :Science Topper
  • HSE Result 2022 : Arts Topper
  • HSE Result 2022 : Commerce Topper
  • HSE Result 2022 : Science Stream Result
  • HSE Result 2022 : Arts Stream Result
  • HSE Result 2022 : Commerce Stream Result
  • COVID-19 Status 05 June : Govt of Manipur
  • Nagaland: Is it fair to blame Indrajit Gupta ?
  • 4th Plenary Session of WMC at Sugnu
  • World Environment Day at Tamenglong
  • World Environment Day at Lilong
  • World Environment Day at Haraorou
  • Musing :: Poem
  • Yet another World Environment Day observed
  • Mounting pressure for solution
  • Padmashree Award Moirangthem Muktamani
  • COVID-19 Status 04 June : Govt of Manipur
  • Congested road at Shirui Village :: Gallery
  • Degree Certificate for Survival #1
  • Admission for National Sports University
  • World Environment Day at Imphal
  • Include Meeteis in the ST list
  • Inhumane act of De-addiction centres
  • UK band Monuments @ShiRock #2 :: Gallery
  • COVID-19 Status 03 June : Govt of Manipur
  • 'Provocation' charges arrests on social media
  • Gerinda Loitongbam: Natl Women Award
  • Timeless Memories :: Poem
  • Ket Meth releases music video Trauma'
  • 8 years of Modi Govt: More hits than misses
  • Bad example commanders
  • Posers parents may raise within
  • Miss Shirui Lily 2022 #1 : Gallery
  • COVID-19 Status 02 June : Govt of Manipur
  • Letters from the Republic of Dust #1
  • Workshop on Food Processing at Lilong
  • 1st June is the Global Day of Parents
  • 'Developing human resource in Manipur'
  • Swachh Bharat Mission (Grameen)
  • 'Yoga for personality development' orgd
  • Row over boundary fencing project
  • Brain storming session of the Congress
  • Lunghar (Imp-Kohima / Jessami) #3 : Gallery
  • COVID-19 Status 01 June : Govt of Manipur
  • Delphi Oinam : Topper at Nagaland HSLC
  • Teaching at Churachandpur Govt College
  • Jadonang Park at Tamenglong renovated
  • Quality seed production of rice (HYV)
  • Audiobook for NEET aspirants launched
  • Naga issue: From bush war to shadow boxing
  • Tenants in Nagaland tag on the NSCN (IM)
  • Wakhom Leikai Lairembi Haraoba #2 : Gallery
  • COVID-19 Status 31 May : Govt of Manipur
  • Pageant winners showcase Robert's collection
  • MIFF to pay homage to Irom Maipak
  • Awareness on Legal rights of women prisoner
  • Election petitions galore in Manipur
  • Training program on mushroom at Nagamapal
  • Must expedite process for border projects
  • Wanted : A far sighted leader
  • Naga Indigenous Wrestling :: Gallery
  • June Calendar for Year 2022 : Tools
  • UK band Monuments @ShiRock #1 :: Gallery
  • Ibudhou Thangjing Lam Thokpa #2 :: Gallery
  • SN Chand: The father of Manipuri cinema #2
  • Licypriya speech at East Timor :: Gallery
  • On 200th Anniversary of MK Binodini Devi
  • Featured Front Page Photo 2022 #2: Gallery
  • Harvesting Fest of Tarao #4 :: Gallery
  • Id-ul-Fitr @Hatta Golapati :: Gallery
  • Rules of English Pronunciation : Download
  • Sub-Syllables in English : Book Download